Gulf R&D Funding a Capital Idea

Houston's hot, and it may get hotter -- and we're talking more than weather.

If a couple of University of Houston professors manage to turn their vision for deep water technology research and development into a reality, they claim it could have a sizzling trillion dollar-plus impact on the Houston/Gulf Coast economy.

Regarding the now-popular belief held by the public in general that the domestic petroleum industry is a dinosaur with no place in today's hi-tech communications (i.e. Internet-driven) world, petroleum engineering professor Michael Economides and his colleague, adjunct professor and director of research development Ron Oligney, make a case to say it isn't so.

But rather than advocate spending tax dollars to maintain the status quo of independent producers with aging fields that can't readily compete in today's marketplace, they propose a revitalization of technology R&D, specifically targeting the deep water (i.e. anything off the continental shelf) Gulf of Mexico.

This, they say, will fuel a renaissance of the domestic industry focused in this area, which will benefit the coastal economies and the United States in general, as well as open the door to opportunity for those operators who otherwise would be spending resources on marginal, low-profit wells.

The United States has been R&D deficient since the October war of 1973, when oil prices went from $3/barrel to $17/barrel in a two-month period, according to Economides. He describes the petroleum industry as suffering from the new lover syndrome.

"We love new reservoirs because they don't deplete as fast or have the problems of mature reservoirs," he said, "and we went into a bi-polar situation starting in the '70s.

"For the last 25 years, the industry operated between the two extremes of a Saudi Arabia type of reservoir, where the adage is you can't screw up a good reservoir, and the opposite end of the spectrum, where you can't afford technology because the price of oil is too low.

Image Caption

Figure 1- USA and lower 48 annual production. Two Houston professors believe the deep water Gulf of Mexico is the best hope for new U.S. reserves.
Graphic by Rusty Johnson; data courtesy of Michael J. Economides

Houston's hot, and it may get hotter -- and we're talking more than weather.

If a couple of University of Houston professors manage to turn their vision for deep water technology research and development into a reality, they claim it could have a sizzling trillion dollar-plus impact on the Houston/Gulf Coast economy.

Regarding the now-popular belief held by the public in general that the domestic petroleum industry is a dinosaur with no place in today's hi-tech communications (i.e. Internet-driven) world, petroleum engineering professor Michael Economides and his colleague, adjunct professor and director of research development Ron Oligney, make a case to say it isn't so.

But rather than advocate spending tax dollars to maintain the status quo of independent producers with aging fields that can't readily compete in today's marketplace, they propose a revitalization of technology R&D, specifically targeting the deep water (i.e. anything off the continental shelf) Gulf of Mexico.

This, they say, will fuel a renaissance of the domestic industry focused in this area, which will benefit the coastal economies and the United States in general, as well as open the door to opportunity for those operators who otherwise would be spending resources on marginal, low-profit wells.

The United States has been R&D deficient since the October war of 1973, when oil prices went from $3/barrel to $17/barrel in a two-month period, according to Economides. He describes the petroleum industry as suffering from the new lover syndrome.

"We love new reservoirs because they don't deplete as fast or have the problems of mature reservoirs," he said, "and we went into a bi-polar situation starting in the '70s.

"For the last 25 years, the industry operated between the two extremes of a Saudi Arabia type of reservoir, where the adage is you can't screw up a good reservoir, and the opposite end of the spectrum, where you can't afford technology because the price of oil is too low.

"This creates opinions that we can find and adapt the technology from outside," he added, "which in my view is nonsense."

Apples and Oranges

Economides noted it will take about 95 million barrels of oil equivalent per day (MMBOEPD) of new production to maintain the current 110 MMBOED worldwide production level over the next decade and cover even a conservative one percent annual increase in demand.

Citing an estimated average worldwide activation index (i.e. up-front money to spend until stabilized flow rates are achieved) of $3,000 per barrel per day, this needed incremental production, if rounded to 100 MMBOEPD, would require a $300 billion investment.

The activation index, which looks at new drilling in new reservoirs, often tends to be confused with other costs.

"One of the key things that not many people understand and that needs illuminating is the widespread confusion between dollars per barrel finding and lifting costs versus what we're talking about," Oligney said. "It's like comparing apples and oranges.

"With finding costs, you label reserves in the ground and take every barrel you call reserves to use as the denominator and say this is the finding cost. But this doesn't say anything about when or even if these reserves come out of the ground.

"You must initiate all of that production, and that is front-end loaded, and we're addressing how much cash it takes to get how much cash flow oil production. The reserves sitting on the books of a company differ from how much cash you have to have to establish production at prevailing economics."

So contrary to the propensity to talk about how cheaply oil can be found and produced in such areas as the Middle East, one must keep in mind that to deliver one MMBOED in, say, Saudi Arabia requires more than a $3 billion investment, according to Economides.

Although the activation index calculated for Saudi Arabia is $3,500/bbl/day, he noted this could escalate dramatically.

"In countries like Iraq and Saudi Arabia and the like," he said, "wave the placard of instability and the activation costs go up immediately."

While it is commonly thought that Saudi Arabia can open the proverbial flood gates, he said it would take $150 billion dollars in up-front investment for the country to deliver the kind of flow rates that would be expected.

Gulf Bonanza?

There are two areas in the world where you get the prolific reservoirs required to absorb the $300 billion capital infusion to activate the new production needed over the next decade, according to Economides:

One locale encompasses the Saudi Arabia-like countries including Iraq, Kuwait and nearby environs.

The other is the deep offshore Gulf of Mexico, which harbors some exceptional reservoirs.

With the best technology, legal and financial infrastructure in the world already in place, technology R&D likely could reduce the current activation index of $9,000/bbl/day in the deepwater Gulf by 50 percent, the academicians said. Also, they predict that both high intensity development of new technology and better deployment of technology together can reduce the accessibility index in the deep water Gulf in the coming five to seven years by a magnitude of 30 to 50 percent.

They propose a deep water technology incentive in the form of a $50 million government investment to fund a program designed to fully exploit the myriad opportunities in the Gulf.

The program would encompass an industry-academia partnership in or near Houston to develop and accelerate the next generation of deep water technologies. This same university would become a deep water information bank to collect, interpret and transmit the needs and technical aspects of the whole enterprise.

Matching funds would be provided for what the two professors label "boutique" oilfield contractors in the Texas coastal region to retool to supply materials, tools, services and manpower for the new deep water era.

With widespread activity in the deep water Gulf already underway, Economides and Oligney purport that planned capital expenditures between $35 billion and $100 billion over the next five to six years could triple or quadruple if development costs were reduced sufficiently. Also, any new technologies could be applied in similar environs throughout the world.

"Conservatively, this means a trillion dollar-plus impact on the Houston/Gulf Coast economy.

"Not only would Houston secure its position as the petroleum capital of the world, complete with a Silicon Valley-type component, but the next generation of petroleum reserves would be developed close to home in a politically stable environment," they said.

When questioned about the need for such a high dollar technology-intensive thrust when the eight-year-old industry cooperative Deep Star program continues to be active in deepwater technology development, Oligney opined that while Deep Star has been beneficial and moved the industry forward, it alone is not the answer.

Indeed, maybe there is room for another such deepwater endeavor.

"Hey," said Deep Star project coordinator Paul Hayes, "if somebody can do it and it turns into something we all benefit from, that's great."